With increased investments in health care, public safety, and other public infrastructure, the engineering and construction sector is expected to thrive. While the companies in the sector continue to grapple with labor shortages and other pandemic-induced headwinds, the introduction of smart technology to improve efficiency should bode well.

The industry landscape is rapidly shifting as engineering firms, contractors, and value chain participants recognize the benefits of technology investments to link, integrate, and automate processes and move the whole value chain onto a secure, intelligent infrastructure. Moreover, the rapidly growing residential construction sector, driven by rising population and other government initiatives, should boost the sector’s growth. The global construction market is expected to reach $14.41 billion by 2030 at a CAGR of 7.3%.

Given the industry’s solid growth attributes, we think it would be prudent to bet on fundamentally sound engineering and construction stocks Stantec Inc (STN), Sterling Construction Company Inc (STRL), Argan, Inc. (AGX), and RCM Technologies, Inc. (RCMT).

Stantec Inc (STN)

Headquartered in Canada, STN provides professional consulting servicing in the field of infrastructure, engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, project management, and project economics internationally. It also offers water, transportation, public works, transportation planning, traffic engineering, etc.

This month, STN was selected by The Southern Nevada Water Authority (SNWA) to help them deliver the $125 million Stage II Reliability Upgrades Project for supporting the long-term sustainable and irrepressible water access for the Las Vegas Valley. STN’s contribution in the Stage II Reliability Upgrades Project will include the design of the new Flamingo Pumping Station and the construction of about two miles of interconnecting pipeline from the station to the Pittman Lateral, which transports water to the central Las Vegas Valley.

Also, this month STN was granted a five-year indefinite-delivery contract to provide a full suite of architectural, engineering, professional, and technical services for the Bureau of Reclamation (Reclamation), a federal agency under the U.S. Department of the Interior. STN will help Reclamation’s mission meet the Western U.S.’s rising water and power demands and preserve the environment.

In the fourth quarter ended, December 31, 2021, the net sales of STN increased 6.3% year-over-over year to C$916.20 million ($715.44 million ). The net income increased 11.3% from its year-ago value to C$16.60 million ($12.96 million ). The company’s EPS rose 15.4% from the prior-year quarter to C$0.15.

The consensus EPS estimate for the first quarter ended March 2022 represents 24.9% year-over-year growth to $0.51. Analysts expect revenue to increase 14.8% year-over-year to 822.40 million for the first quarter ending March 2022. In addition, it has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of the trailing four quarters. The stock gained 33.6% over the past year and 15.3% over the past nine months.

STN’s POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock also has an A grade for Stability and Quality and a B for Growth. Within the B-rated Outsourcing – Business Services industry, it is ranked #4 of 43 stocks.

Beyond what we’ve stated above, we have also given STN’s grades for Value, Momentum, and Sentiment. Get all the STN ratings here.

Sterling Construction Company Inc (STRL)

STRL is a construction company that provides heavy civil and specialty services and residential construction activities. It is also engaged in undertaking various heavy civil construction projects for departments of transportation in various states and other authorities. It provides commercially concrete projects for the blue-chip end-users in e-commerce, data center, and other related fields.

In December, STRL entered into a Stock Purchase Agreement and acquired Petillo, a leading specialty site development solution provider, and its related operating activities. Joe Cutillo, Sterling’s Chief Executive Officer, stated that STN’s entrepreneurial spirit of focusing on delivering customer-centric solutions coupled with Petillo’s geographic footprint would enable them to service their key blue-chip e-commerce customers along the entire East Coast with more offerings than before.

Also, in December, STRL acquired Kimes & Stones for an all-cash purchase price of $7.6 million. It offers various soil stabilization services on e-commerce projects such as large fulfillment and distribution centers and soil stabilization for roadways and manufacturing plant construction. “The addition of Kimes allows us to broaden further our e-infrastructure service offering to our key blue-chip customers throughout the southeast,” said Joe Cutillo, Sterling’s Chief Executive Officer.

During the third-quarter ending on September 30, 2021, STRL’s revenue increased 20.9% year-over-year to $463.45 million. Its operating income grew 11.1% from the year-ago value to $32.03 million. The company’s net income rose 39.4% from the prior-year quarter to $21.13 million, while its EPS increased 33.3% year-over-year to $0.72.

Analysts expect STRL’s revenue to increase 4.7% year-over-year to $330.00 million in the quarter (ending March 2022). The consensus EPS estimate of $0.37 represents 85% year-over-year growth for the fourth quarter (ending December 2021). In addition, the company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of the trailing four quarters. The company’s shares surged 25.7% over the past six months.

STRL’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our POWR Ratings system. STRL is also rated a B grade for Growth, Value, and Quality. Within the B-rated Industrial – Services industry, it is ranked #8 of 91 stocks.

In total, we rate STRL on eight different levels. To see additional POWR Ratings for Momentum and Stability for STRL, click here.

Argan, Inc. (AGX)

AGX provides engineering, construction, consulting, procurement, technical, project development, and maintenance services to the power generation and renewable energy markets through its subsidiaries. The company primarily operates through three segments: Power Industry Services; Industrial Fabrication and Field Services; and Telecommunications Infrastructure Services.

AGX’s revenue came in at $124.45 million during the third quarter ended October 31, 2021, while its net income increased 31.1% year-over-year to $12.39 million. The company’s EPS grew 34.6% from its year-ago value to $1.05. Its operating income rose 32.9% from the prior-year quarter to $14.54 million.

AGX is expected to witness revenue growth of $503.15 million, representing year-over-year growth of 28.3% in fiscal 2022. The consensus EPS estimate of $2.51 for fiscal 2022 indicates a 66.2% improvement year-over-year. In addition, the company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in all of the trailing four quarters. Its stock has gained 2.1% over the past month.

AGX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Quality and Sentiment and a B for Value. Within the B-rated Industrial – Building Material industry, it is ranked #8 of 54 stocks.

Beyond what we’ve stated above, we have also given AGX’s grades for Growth, Stability, and Momentum. Get all the AGX ratings here.

RCM Technologies, Inc. (RCMT)

RCMT provides business and technology-related services and primarily operates through three segments: Engineering; Specialty HealthCare; and Information Technology. The Engineering segment provides a range of engineering services, whereas the Specialty HealthCare segment offers long-term and short-term staffing, executive search, and placement services. The Information Technology segment provides enterprise business solutions, application services, and other vertical market-specific solutions.

For the third quarter ending October 2, 2021, RCMT’s net sales increased 44.1% year-over-year to $45.47 million. Its operating income came in at $3.72 million compared to an operating loss of $158 thousand in the prior-year period. The net income amounted to $2.75 million compared to a net loss of $0.24 million in the third quarter of 2020. The company’s EPS amounted to $0.24 over this period.

Analysts expect RCMT’s revenue to increase 24.2% year-over-year to $51.11 million in the fourth quarter ended December 2021. The EPS is expected to increase 320.4% year-over-year to $0.14 in the fourth quarter. The stock soared 82.7% over the past nine months and 16.7% over the past month.

It is no surprise that RCMT has an overall A rating, equating to Strong Buy in our POWR Ratings system. The stock also has an A grade for Growth and Value and a B for Sentiment and Quality. Among the 20 stocks in the A-rated Outsourcing – Staffing Services industry, it is ranked #3.

Click here to see the additional POWR Ratings for RCMT (Stability and Momentum).

STN shares were trading at $50.18 per share on Friday afternoon, down $1.34 (-2.60%). Year-to-date, STN has declined -10.79%, versus a -8.05% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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